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Software Escrow and SaaS/Cloud Solutions, are they right for my business?

January 5, 2014

SaaS applications are becoming more and more common. With a SaaS solution, the software supplier hosts the software and stores client’s data on its web servers or leased servers. The requirement for a technology escrow agreement is important because the source code, object code and access to the client data are controlled by the software supplier.

Forrester Research announced an Enterprise Software Licensee’s Bill of Rights (the LBoR). While it is nothing like the Founding Fathers’ declaration of rights, Forrester boldly proclaimed that licensees need certain rights to free themselves from “onerous [software] ownership restrictions.” For example, enterprise software can be one of a company’s largest investments, subscribers of SaaS applications, like distributed applications, have constraints on how they may use the application. For example, unilateral modification and or maintenance of the software are generally not permitted without the software vendor’s approval. It is simple business that a supplier, who owns the IP, is more than justified in charging its customers a reasonable fee for the use as well as the modification of the application. That is the sole purpose of business and we all understand and appreciate it. However, over time as the customer invests more time and money in training its staff to use the software solution and it buys equipment and develops expertise in using the software solution to take care of its customers, it creates enormous asset value for its own account. This investment could easily equal or outspend the annual licensing and or maintenance fees the customer pays for the use of the software. All things being equal, software suppliers encourage such activity and in deed have a vested interest in the success of its subscriber customers in the use of the application. In fact, software suppliers want nothing more than their subscribers to effectively use the software application in furtherance of their own business success. This creates a successful long term business relationship.

Ray Wang, the Forrester analyst who is one of the authors of the LBoR, mentioned above, talks about a “slow shift” in the pendulum in favour of the licensee with “new deployment options” such as SaaS. For this reason, plus because of increasing vendor consolidation during this, the Great Recession, on July 7, 2009 Forrester added 11 more items to its LBoR. Based on discussions with CIOs, business process and apps professionals, systems architects and IT licensing experts, Forrester concluded SaaS vendors should provide their customers with software and database escrow protection from a reputable, established escrow agent. Forrester says the [technology] escrow company should keep in trust a copy of the source code, the customer’s databases, object code and related material to reproduce the SaaS environment in the event the SaaS vendor fails to provide services at the contracted level or worse, goes out of business.

And why not? Think about it. Having a reasonable and balanced technology escrow agreement already in place assists the SaaS provider in numerous ways. For example, (1) it address its customer’s immediate and real concerns about being totally dependent on the vendor, (2) it cements a business relationship based on trust and (3) assists the provider in adding a new client.

Conversely, the same technology escrow agreement assists the provider’s customer because the supplier, its IP, subscribers’ databases, maintenance activity, data centre operations and virtually every significant function associated with using an application, resides with the vendor and should a pre-determined event occur that may require release of the intellectual property, a properly drafted technology escrow agreement gives the subscriber access to critical information in a reasonable time period to keep the solution running and allow the subscriber to avert its own disaster.

Technology escrow is a modestly priced protection tool that helps subscribers’ mitigate the risk of total reliance on a single supplier for a vital business function and a technology escrow helps SaaS vendors close more deals and do more business. Its win-win.

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written by David Clee

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